US GDP (Q3 2024 – third estimate)

A robust but gently decelerating US economy

• The US economy remains on a solid growth trajectory supported by healthy employment and income growth, robust consumer spending and strong productivity momentum that is helping tame inflationary pressures. We expect these positive dynamics will carry into 2025, allowing the Fed to pursue gradual but more cautious policy recalibration. Still, the outlook is clouded by unusually high uncertainty surrounding regulatory, immigration, trade and tax policy. We foresee real GDP growth decelerating modestly from 2.7% in 2024 to 2.1% in 2025 and 1.7% in 2026.
  
  
• The final estimate for Q3 real GDP showed the US economy grew at a faster 3.1% annualized pace in Q3, a notable upgrade from the prior estimate of 2.8%. The upward revision to real GDP was driven by stronger consumer spending on services, stronger export growth and sturdier business and government spending. Final sales rose a robust 3.3% while inventory subtracted 0.2 percentage points (ppt) from real GDP growth. Final sales to private domestic purchasers – showing the contributions from consumer spending, residential and business investment – advanced an impressive 3.4%. Going forward, we anticipate more moderate real GDP growth of 2.5% annualized in Q4 2024. 
  
  
• Consumer spending was the main engine of growth, posting a robust and upwardly revised 3.7% advance in Q3. Spending on durable goods rose 7.6% on broad-based strength across motor vehicles, furnishings and household equipment, and recreational goods and vehicles. Nondurable goods advanced by the most since Q2 2021, up 4.6% amid stronger demand for gasoline, food and clothing. Spending on services rose 2.8% (up 0.2ppt from the second estimate) driven by stronger outlays on health care and financial services. 
  
  
• While consumer spending momentum remains well supported by robust income growth, slowing labor market trends should lead to increased consumer prudence, especially for lower- to median-income families who are grappling with higher debt burdens and reduced savings buffers. We foresee gradually cooling consumer spending growth from 2.7% in 2024 to 2.2% in 2025 as slower employment growth weighs on income trends and prices and rates remain generally elevated. 
  
  
• Residential investment remained significantly constrained, down 4.3% in Q3, but the decline was revised up by 0.7ppt. While the worst of the housing sector correction is behind us, historically low affordability – made worse by the recent rebound in mortgage rates and slower income growth – will cap residential investment growth in the coming quarters. Construction activity is, however, still likely to benefit from an undersupplied housing market. 
  
  
• Business investment maintained solid momentum with growth revised up from 3.8% to 4.0% as a solid advance in equipment and moderate growth in intellectual property offset the weakness in structures investment. Equipment investment surged 10.8%, after a sturdy 9.8% bounce in Q2, driven by a surge in investment on information processing and transportation equipment. Intellectual property investment only grew 3.1%, reflecting strong growth in software investment and a rebound in R&D spending. 
  
  
• Net international trade subtracted 0.4ppt to GDP growth, compared with a 0.6ppt drag in the prior estimate. The strong increase in exports was revised higher to 9.6% (compared with 7.5% previously) while imports rose 10.7% (compared with 10.2% previously). Looking ahead, we anticipate cooler imports as domestic activity cools and moderate exports momentum as global activity maintains a modest pace. 
  
  
• Government spending growth picked up to 5.1% as federal outlays rose 8.9% driven by a 13.9% advance in federal defense outlays. Spending growth at the state and local level picked up modestly to 2.9%. The re-acceleration in gross investment growth likely points to outlays support from the CHIPs Act and Inflation Reduction Act (IRA).
  
  
• Price pressures continued to ease in Q3 with headline personal consumption expenditures (PCE) inflation flat at 2.3% year over year (y/y) – the lowest since Q1 2021 – and core PCE inflation steady at 2.7% y/y – also the lowest since Q1 2021. Despite recent inflation bumpiness, economic fundamentals remain disinflationary. We expect the moderating trend in inflation will remain in place into early 2025, though it could then change as deregulation, potential immigration restrictions and tariffs could lead to a renewed inflation impulse. We see the Fed’s favored inflation gauge, the core PCE deflator, at 2.2% y/y in Q4 2025 and 2.3% y/y in Q4 2026.
  
  
• Looking ahead, we expect policymakers at the Fed will slow the recalibration process in 2025 as they feel their way to a neutral policy stance and navigate upside risks to inflation. Earlier this month, we revised our forecast to show a rate cut at every other meeting through Q3 2025, for a total of 75 basis points (bps) of easing (down from 100bps previously). This would translate into a January skip and a March rate cut.